Strong growth in new business premium, improvement in value of new business (VNB) margin, strong distribution network and management’s continual focus on product diversification — have kept SBI Life ’s performance in good stead in the latest September quarter.

The life insurer reported strong growth in gross written premium (GWP) and new business premium (NBP) of 36 per cent and 40 per cent respectively in the first half of FY20, led by protection, annuity and individual non-par savings businesses.

Renewal premiums too grew by a strong 33 per cent YoY.

While SBI Life’s expansion in VNB margins aided by healthier product mix and improvement in market share within private players are key positives, the insurer’s profit after tax was impacted by new business strain and provision of about ₹70 crore for diminution in the value of investments in shareholder’s account. Of the ₹70 crore provision, ₹67 crore pertained to DHFL exposure. As a result, SBI Life’s net profit declined by 48 per cent YoY to around ₹130 crore in the latest September quarter.

Also read:SBI Life Insurance Q2 net profit down 48 per cent

Nonetheless, product diversification, leadership position, strong distribution network and improvement in cost efficiencies, are key positives that augur well for the stock over the long run.

Strong performance

Given the challenges in the savings business, life insurance players have been focussing on protection business.

Savings products essentially comprise of linked, participating and non-participating policies. Protection products provide cover for life, disability, critical illness and accidental death. These pure risk protection products are low-cost.

SBI Life continued its focus on the protection business, and grew the business at a healthy clip in the September quarter, aiding margins. It’s protection new business premium increased by 59 per cent YoY in the first half of FY20, share of protection NBP has inched up from 11 per cent last fiscal, to 12 per cent as of September quarter.

This has aided the robust 33 per cent growth in VNB, with 100 basis points expansion in VNB margin in the first half of FY20.

Driving value of new business (VNB) is important for life insurance players. Since premium payments for life insurance policies are typically spread out over by a period of time, cost of new customer acquisition is high, leading to new business strain in the year of sale. Hence, VNB is a key measure to assess the financial performance of insurers. Essentially VNB is a measure that values future profit streams of the new business written during the year.

SBI Life’s 100 basis point improvement in VNB margin was led by 400 basis points improvement from change in product mix, offset by 300 basis points negative impact from fall in interest rates.

Diversified product portfolio

SBI Life’s diversified product portfolio augurs well for growth. Individual savings business currently forms 59 per cent of new business premium; within that ULIPs are about 43 per cent. The management has been diversifying its product mix, focussing on immediate annuity, group annuity and non-par products.

Persistency measures the number of policies (or amount of premium) retained with an insurer across different time periods. SBI Life’s 13th month persistency has marginally improved to 85.8 per cent (85.1 per cent in FY19), as also its 61st month persistency to 57.5 per cent (57.2 per cent in FY19). Operating expense ratio has also improved, falling to 6.5 per cent from 7.8 per cent in the first half of last year.

Some concerns

In the September quarter, SBI Life’s profit was impacted by the provision for diminution in the value of investments in the shareholder’s account.

According to the management’s conference call, ₹67 crore pertained to DHFL exposure, which is 48 per cent of its exposure to the housing finance player. The rest would be provided for in the subsequent quarters.

SBI Life has exposure of Rs 380-400 crore to stressed companies such as Indiabulls Housing, Yes Bank etc., which are standard accounts as of now.

The management is looking to reduce pricing in its term plan to be more competitive. While this would lead to loss in VNB margins, the management expects this to be partially offset by increase in volumes.

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